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Add to MSN Stock List Message Board Related Resources What industries are winning and losing? Screen for the best stocks for you See how MSN Moneys StockScouter rates a stock Find out today's big trends Jubak's Journal Recent articles: • Now, only cheap stocks will make you money, 1/16/2004 • 7 stocks that like a falling dollar, 1/13/2004 • 10 real-world indicators give '04 a thumbs up, 1/9/2004 More... | Jubak's Journal 5 big winners from the J.P. Morgan/Bank One deal Consensus is that the J.P. Morgan/Bank One deal will set off a new merger wave in banks. Here are potential targets, plus the banks that win without even playing. By Jim Jubak Ripples from the $58 billion bid by J.P. Morgan Chase According to the Wall Street consensus, the short list includes AmSouth Bancorp. The trick now for investors is to whittle the list down even further -- to pinpoint which banks are this years most likely targets, which banks get snapped up because they are strategically positioned, and which banks benefit despite their status as nonplayers in the merger activity.
From these three perspectives, Ive put together my own shorter short list of five bank-stock winners coming on the heels of the J.P. Morgan deal.
The logic behind the Morgan/Bank One deal Before diving right into my picks, it would first be useful to understand the logic behind the J.P. Morgan deal. Like the 1998 acquisition of San Franciscos BankAmerica by North Carolinas NationsBank that created todays Bank of America But unlike the wave of mergers that created J.P. Morgan, which was about adding heft in traditional Wall Street preserves such as corporate underwriting, this deal is about consumer banking. J.P. Morgan is a great wholesale and commercial banker with a solid portfolio of products such as mortgages to sell to consumers, but it lacks what in the grocery business would be called shelf space. Buying Bank One, with its vast network of retail branches, will allow J.P. Morgan to put existing and new products in front of more retail customers. Theres nothing especially original about this. It is exactly the strategy that Citigroup has pursued so successfully for years. But the Citigroup model clearly works. With current Bank One CEO Jamie Dimon, who learned his craft at Citigroup, set to take over as CEO of the joint company in 2006, theres every reason to believe that the new J.P. Morgan Chase will have success with the model as well.
Banks arent bought; theyre sold And last, its important to remember the Wall Street adage that banks arent bought; theyre sold when management and the board of directors decide that the company has played out its string. Bank One wouldnt have been part of this deal or in play at all except for its lagging performance in recent years. Despite CEO Dimons work in saving Bank One from disaster, the bank still has a woeful record in earnings per share growth and stock performance over the last five years. So, not so coincidently, did FleetBoston Financial According to Lehman Brothers, out of 24 regional banks, Bank One had the fourth-lowest compounded earnings per share growth for 1998-2003, and FleetBoston had the second lowest. FleetBostons stock was the worst-performing regional bank stock from 1998 through the Bank of America offer, Lehman calculates, and Bank One was the fifth worst. The banks had also run out of strategic room: It wasnt clear what Bank One or FleetBoston could do to get growth cooking again. Both banks, and most especially Bank One, were centered in regions that were experiencing the worst of the recent decline in manufacturing. So which of the Wall Street consensus shortlist banks measure up best against the logic of this deal?
How big will the premium be? None of these banks is big enough to pack the kind of punch in an acquisition that Bank One did. Theyre important add-ons, but they wont vault a bank to the top of the heap. Thats why a few on Wall Street are naming Wachovia More on bank stocks at MSN Money
Wachovia has enough market share in the Southeast to make an acquisition a big deal for one of the national players that hasn't yet moved into the region. Arguing against that is the recent turnaround at the bank in the last two years: It has outperformed since 2001, Lehman Brothers calculates. Applying the price paid by J.P. Morgan Chase to the three regional laggards, Lehman Brothers calculates a potential deal premium of 20% for KeyCorp, 20% for AmSouth and 8% for Comerica. The Southeast as prime hunting ground In the search for post-deal winners among bank stocks, the next step is to look at which stocks have been left out in the acquisition dance so far but still deliver some of the logic of this deal. Look to the Southeast below North Carolina and Virginia. This section of the country has been pretty much bypassed by the big deals. The logic of the deal says thats most likely because banks in this region, one of the fastest growing in the country, havent felt a need to sell: They still have plenty of growth ahead of them just doing what theyve been doing. That may mean that AmSouth is a likely subject of acquisition speculation but an unlikely acquisition candidate. But with the number of attractive regional franchises falling with each deal, its not clear how much longer banks with national consumer ambitions can ignore the grand prize. That, of course, is Florida, now the nations fourth most-populous state behind California, Texas and New York. AmSouth is a major presence in Florida with a 2.5% share. SouthTrust, also a member of the Wall Street consensus short list, has a 4% share. SunTrust is the most intriguing bank of all. It has an 11% share of the Florida market, plus 14% of the Georgia market. Importantly, the bank is also a performance laggard. Despite the strong population growth in its market area, SunTrust has one of the worst revenue growth rates among large-cap bank stocks, Raymond James calculates. The biggest winners may not be acquired The biggest bank stock winners from the huge acquisition deals like Bank of America/FleetBoston and J.P. Morgan Chase/Bank One, however, may be shares of banks that arent acquired at all. Im sure, for example, that the CEOs of Washington Mutual These two banks and one savings and loan launched major attacks on the New York market in 2001. The target is the retail banking customer, and the method of attack is service: more convenient hours of operation, lower account minimums, free coin-counting machines. These three have felt comfortable taking on J.P. Morgan Chase and Citigroup in their home market and in going head to head with regionals that have bought their way into the market. And theyve been winning market share. Commerce and Washington Mutual are two of a very small number of banks that can actually pursue a strategy of building new branches and make money at it. According to BankStocks.com, only 20% of banks are able to execute the strategy profitably. And the difference between that successful 20% and the worst is immense. Three years after the average new branch opens, it has $12 million in deposits. The best 20% of branches, however, average $30 million in deposits, while the average deposits at the bottom 20% are just $4 million. (Besides Commerce and Washington Mutual, BankStocks.com names Downey Financial Big bank plus big bank = opportunity for competitors What does this have to do with the recent big deals? Plenty. A bank like Commerce Bancorp has become expert at picking off competitors' customers in the midst of deal-induced confusion and turmoil. The bank has done it in the New Jersey and Pennsylvania markets, snagging unhappy customers during the acquisitions of First Union, CoreStates and Summit. (Who was Summits acquirer? FleetBoston, of course. And who took over CoreStates in Philadelphia? First Union. And who took over First Union? Wachovia. Actually, it was the other way around, but First Union decided to keep the Wachovia name. But you see what I mean by confusion and turmoil?) If Commerce, Washington Mutual and North Fork Of the three financial institutions Ive mentioned, Id go with Commerce as the winner among nonacquiring/nonacquired banks. Its been down this road so many times before that it knows how to take advantage of the mergers and acquisitions market without ever being a player. And thats my scorecard for the banking industry as this most recent deal continues to rearrange the playing field. New developments on past columns 8 great blue chips youve never heard of On Jan. 16, Donaldson Co. Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Donaldson. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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